A spate of auditor resignations at Chinese property companies is reigniting concerns about financial transparency in an industry facing a credit squeeze and more than US$60 billion of bond redemptions this year. PwC quit its role at Hopson Development on January 27, citing inadequate access to necessary information, while Deloitte stepped down at China Aoyuan a day earlier, exchange filings showed. Shimao Group’s mainland unit will change its auditor, Shanghai Certified Public Accountant, for the first time in 27 years on January 24. The changes are a red flag for investors who have been putting up with growing credit defaults among cash-starved developers since August 2020 when the Chinese government began imposing stringent debt discipline under its ‘three red lines” policy. “Changing auditors just ahead of year-end results, without clear explanation, could imply a deficiency in internal controls,” said Gao Fan, a credit analyst at S&P Global Ratings. “It bolsters our view that Chinese developers need to increase their financial transparency.” The resignations came at a sensitive time as Chinese developers prepare to report their latest set of corporate earnings. Incidents of hidden debt, or off-balance sheet borrowings, have spooked the market after companies including China Evergrande and Kaisa Group disclosed it sold billions of high-yielding wealth management products to augment their cash flow. The Hong Kong Financial Reporting Council, the city’s audit watchdog, earlier asked PwC to explain the adequacy of its work for China Evergrande, after its debt crisis that later led to a default on its dollar bonds in December. Liquidity stricken Shimao seeks buyers for some 40 projects valued at over US$12 billion Chinese real estate companies face US$30.8 billion in offshore bond repayments this year, and another US$30.2 billion in domestic bond obligations, according to Moody’s Investors Service. The numbers may be understated by off-balance sheet debt, analysts have warned. Chinese developers have struggled to access new funds as the loan and bond market froze for the highly geared firms. Many have resorted to selling their projects or prized assets at discounted prices. While China’s economic slowdown is not as severe as in 2015, the contraction in the US$1.7 trillion housing market is comparable to the severity seven years ago, according to BCA Research. “Across the sector, earnings delays are seen to be probable as auditors evaluate builders’ money circulation and liquidity,” Citigroup analysts wrote in a research note in January. A prolonged delay could hurt its credit standing and the market’s perception of its governance, S&P added. Investors shun Chinese developers as bond sales slump 70 per cent with market frozen for many junk-rated borrowers amid defaults Aggregate sales of China’s top 100 developers fell 41 per cent to 526.6 billion yuan in January from a year earlier, after a 38 per cent slide in December, according to data compiled by China Real Estate Information Corporation. That bodes ill for the upcoming earnings season. “The financial year 2021 results could potentially be the weakest in history with only 2 per cent earnings growth, [which miss market expectation] and big divergence among developers,” said Stephen Cheung, an analyst with Jefferies. “We may see more departures of auditors, as they tighten their scrutiny of Chinese developers’ accounts, after what happened to those defaulted ones,” said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institute.